$29.1 billion deal closes

resulting giant could be a bitter pill for Walgreen

Express Scripts Inc.on Monday completed its acquisition of rival Medco Health Solutions Inc. in a $29.1 billion deal that could have major implications forWalgreen Co.

The deal was announced after the Federal Trade Commission lent its formal approval after 8-month antitrust investigation of whether the merger would hurt competition in the pharmacy benefits management sector. PBMs administer prescription-drug insurance coverage for employers and insurers.

The new company, which will be called Express Scripts Holding Co., becomes the largest pharmacy benefits manager in the nation, filling a combined 1.4 billion prescriptions a year for employers and insurers, according to Express Scripts.

In 2011, about 213 million of those prescriptions were filled at drug stores operated by Walgreen, representing more than a quarter of the Deerfield-based company's total.

For Walgreen, the nation's largest drugstore chain, the deal takes on added significance because of its ongoing spat with St. Louis-based Express Scripts over pricing. The two companies parted ways on Jan. 1 after they were unable to come to terms on a new contract that would cover more than $5 billion in business.

As a result, Walgreen lost roughly 85 percent of the prescriptions it filled for Express Scripts customers through the quarter ended Feb. 29, contributing to a 7.6 percent slide in Walgreen's earnings.

On an annual basis, Express Scripts accounted for about 88 million of the 819 million prescriptions Walgreen filled in 2011.

Now that Express Scripts has Medco in the fold, Walgreen could be looking at an even bigger loss of prescription volume. Walgreen filled 125 million scripts for Medco last year and is on pace to fill about 108 million in 2012 and 74 million in 2013, according to Walgreen figures.

If Walgreen ends up losing the Medco business following the merger, Walgreen investors should "expect further damage to sales and profits," Carol Levenson, an analyst for Gimme Credit LLC wrote last week in a note to clients.

Shares of Walgreen rose 2 percent, or 67 cents, to close Monday at $34.16. Express Scripts' stock jumped 2.4 percent, or $1.32, to close at $55.50.

While Walgreen last week defended its decision to walk away from Express Scripts, it insisted it plans to honor the terms of its contract with Medco post-merger unless the new company moved to sever the contract or alter its terms.

Express Scripts Chief Medical Officer Steve Miller said Monday that the company plans to honor the Medco-Walgreen contract — at least in the short term.

"As of today, we're honoring that contract, but we'll have to see going forward," Miller said.

Express Scripts has not had access nor was it able to discuss the Medco-Walgreen contract until Monday per FTC rules, Miller said. Now that the merger has been approved, the company plans to begin examining contracts with drug manufacturers and drugstores, with Walgreen "high on the list of first review."

Express Scripts hopes to complete the integration of the companies over the next 18 months, Miller said.

Michael Polzin, a Walgreen spokesman, said the company was "pleased that Express Scripts said (Monday) that it, too, intends to honor Medco's contract with us."

Neither Walgreen nor Express Scripts would say how long the contract extends.

"The question is what happens when that contract is up," said Matthew Coffina, an analyst withMorningstar Inc."Generally speaking, it is very unlikely that Express Scripts would for a very sustained period of time allow Walgreens to work with Medco and not Express Scripts."

In other words, the future relationship between the two companies is an all-or-nothing proposition.

Walgreen and Express Scripts either have to come to terms on an the entire book of business or cut ties altogether, Coffina said.

The prospect of a deal between the two companies, he said, "depends in large part on whether Walgreens is willing to accept reimbursement terms that are worse than they hoped for."